Money Rushes Into Social Start-Ups

By

Geoffrey A. Fowler

Updated March 24, 2011 12:01 a.m. ET

As Wall Street and other investors clamor for a piece of social-networking giant Facebook Inc., Silicon Valley venture capitalists are betting on a new generation of companies that hope to unshackle social networking from personal computers—and shift it to the cellphone.

On Thursday, Color Labs Inc., a phone-based social network founded by veteran entrepreneur
Bill Nguyen,
is opening its doors. The Palo Alto, Calif., start-up recently secured $41 million from top venture-capital firms including Sequoia Capital even before the company's iPhone and Android apps were ready to debut.

Color, a new app, launched Thursday with the goal of re-inventing the idea of social networking for the smartphone era. Now the question is whether it's worth the $41 million in funding - and whether users are ready for its notion of privacy.

Venture Capital Seeks Some Color

A Color Labs staffer balanced on a skateboard during a recent strategy meeting. Brian L. Frank for The Wall Street Journal

The idea behind Color is that a phone's location-sensing abilities can build a user's social network for them, allowing users to share photos, video and messages based simply on the people they're physically near. The company's view on privacy is that everything in the service is public—allowing users who don't yet know each other to peer into each other's lives.

Color is just one of a growing number of social start-ups betting on smartphones that are now attracting a venture-funding rush. Many of the companies feature photo taking and sharing at their core, such as Path Inc., founded by former Facebook executive
Dave Morin.
It received $8.5 million last month from Kleiner Perkins Caufield & Byers and Index Ventures. It has also had conversations with
Google
Inc.
about a buyout, according to a person briefed on the discussions. Google declined to comment.

Another phone photo-sharing company, Instagram, was barraged by inquiries from nearly 40 investors before settling last month on $7 million from Benchmark Capital.

Mobile Social

Some of the smartphone-based services gathering interest from investors.

ENLARGE

"We would have people show up at our offices every other day wanting to meet while we were trying to get work done," said Instagram co-founder
Kevin Systrom.
Since launching in October, the service has nearly three million users, he said.

In addition, Yobongo Inc., a three-week-old iPhone app that lets users chat with people located in their geographic area, said Wednesday it raised $1.35 million. In January a group-texting service called GroupMe said it raised $10.6 million.

The flood of venture capital into mobile social start-ups is the latest sign of Silicon Valley's Web-fueled boom. In recent months, investors have driven up the valuation of Facebook above $60 billion and social-gaming company Zynga Inc. to $10 billion.

Behind the spurt of new services is also the idea that the phone, carried by people at all times, can reinvent the notion of a social network by sharing more real-time information about where people are, what they're seeing and even who they're around.

The phone "provides a platform for developers to build experiences that are more personal in nature," said Path's Mr. Morin. What's different now is the ubiquity of smartphones and tablets. "Now you have an opportunity to create these experiences at scale," he said.

The rush into mobile social companies also comes as Facebook is honing in on phones. Facebook, which has more than 200 million users of its services on cellphones, this week bought mobile-technology company Snaptu and earlier this month acquired group chat room service Beluga.

More

Last year, Facebook also unveiled a check-in service for its phone apps that allow users to volunteer their location to friends, and also find deals from nearby businesses. The company is now at work on efforts to integrate its capabilities deep into phone operating systems, potentially expanding the sorts of things people can do with their Facebook friends on the go.

A Facebook spokesman said the company's platform is used by many phone apps.

"We're excited to be the technology that many of the leading mobile apps are using to help people connect with friends through games, music, photos and commerce," he said.

Unlike Facebook, Color eliminates the acts of "friending" and selecting privacy settings. That's because when it is turned on, Color collects global positioning, gyroscope, ambient lighting and other data from phones to determine who else is in close proximity.

That means users will temporarily join the group of people at a birthday party or rock concert—even strangers on a train. Phones running the Color app automatically share photos and videos taken with other phones running Color nearby.

"Instead of seeing your friends online alone in front of a PC, we allow people to interact with each other in real life," said Mr. Nguyen, who previously founded online music start-up LaLa, which was acquired by
Apple
Inc.
in 2009, among other companies.

Of the $41 million that Color raised, $25 million came from Sequoia and $9 million came from Bain Capital Ventures, with the rest from Silicon Valley Bank. "Color is at the confluence of the mobile, social and local phenomena," said Sequoia partner
Doug Leone,
of the 30-person start-up, which is seven months old.

Services like Color raise questions about how people might use them and deal with privacy. Mr. Nguyen said Color doesn't ever promise that photos, location and other information will be private.

Such capabilities will require good faith from users (for example, to keep public photos G-rated) and could push people to change their social behaviors.

Color's business model, like many free mobile social services, remains a work in progress. Mr. Nguyen said the company might eventually sell premium services to local businesses like restaurants, which might be able to highlight photos of popular dishes or daily specials, or learn more about which Color-using customers come to the restaurant most often.

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